Why I think FTSE 100 medical tech stock Smith & Nephew looks a good investment

I like the investment case for FTSE 100 medical tech stock Smith & Nephew. It’s been hammered by the pandemic but I think the future looks promising.

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FTSE 100 medical technology stock Smith & Nephew (LSE:SN) is an international brand that’s been around for 165 years. While some healthcare stocks have thrived during the pandemic, Smith & Nephew has struggled. It provides replacement prosthetic hips and knees for operations. And with most elective surgery postponed or cancelled recently, the company has lost orders and reduced its revenue.

Short-term struggles

Nevertheless, when considering the bigger picture, I think it’s easy to see that this is a short-term problem. I believe surgery is going to return with a vengeance and the FTSE 100 company will pick up again. With the NHS facing a massive backlog (around five years waiting time for a knee or hip replacement), I think more and more patients will opt for private surgery.

Its full-year 2020 results released last week were disappointing, causing the stock to fall 5% and making it the worst performer in the FTSE 100 index. In Q4, Smith & Nephew’s revenue fell 7% on an underlying basis. Full-year revenue for 2020 was $4.5bn, an underlying drop of 12%. Its trading profit margin was 15%, which was affected by lower gross margins, increased research and development and general costs. Meanwhile, cash generated from operations fell 29%.

Although further lockdowns were disappointing for Q4, the slowdown was less severe than in Q2. That’s because it was less of a shock and the healthcare system had adapted to manage a lower level of elective surgeries while maintaining Covid-19 safe practice.

There’s strength in the FTSE 100

The good news is, it’s still paying a dividend, making acquisitions and investing in R&D. And in the year ahead, its focus is on recapturing its pre-pandemic momentum. Recovery is likely to be slow in the first half of this year. But hopefully this will pick up pace going into 2022.

Smith & Nephew has launched its CORI robotics system to a positive response. It’s also enjoying vigorous growth in Sports Medicine Joint Repair with its REGENETEN Bioinductive Implant for tendon repair. This product and another called NOVOSTITCH are doing well in the US and have yet to roll out in other markets, meaning potential for increased revenues is present across the company portfolio.

In January it completed its $240m acquisition of Extremity Orthopaedics business of Integra LifeSciences Holdings. This comes a year after its Tusker Medical acquisition. This division operates Tula, an innovative system to treat recurrent or persistent ear infections, particularly in children.

Smith & Nephew’s financial position

The company has a £12.5bn market cap. It has a price-to-earnings ratio (P/E) of 39, and earnings per share are 36p. With a strong balance sheet, the company felt confident in maintaining its progressive dividend policy. Its full-year distribution is 37.5¢ (27p) per share, which gives a yield of 1.9%.

Smith & Nephew has access to committed debt facilities of $4.5bn for around five years. Debt due this year amounts to $265m.

The high P/E shows many shareholders already feel bullish towards this stock. I feel that way too and would like to own shares in Smith & Nephew. Recovery could be slow, there’s a road map out of the pandemic, but no guarantees on the timeline. As a long-term investment, I think this FTSE 100 stalwart has what it takes to go the distance. I imagine when Smith & Nephew’s share price recovery comes, it will be swift, and I’d like to be a shareholder before that happens.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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